Is IMF's cure worse than the disease?

The International Monetary Fund (IMF), being the lender of last resort for countries in balance-of-payments crisis or in danger of default, almost always ties its bailouts to excessive austerity measures. Its loans are tied, to use IMF jargon, to "structural adjustment programmes" and "conditionality". These programmes centre on raising taxes and/or spurring tax rate reductions, balancing the budget at all costs, devaluing the currency and increasing interest rates. Such anti-growth policies, delivered in line with IMF diktat, have been shown in the majority of cases to have actually increased the country's dependence on the IMF over time. Just think of what has happened in Argentina, Pakistan, Ecuador, Egypt or Ghana.

Since 1980, the conditionality-induced structural adjustment programmes (SAPs) have become a major part of the standard crisis-management and post-crisis economic reform toolkit. According to the IMF, these reforms aim at restoring or maintaining "balance of payments viability and macroeconomic stability while setting the stage for sustained, high-quality growth".

The IMF measures the success of its programmes according to "the frequency of successor programme engagements", which is not a measure of success but rather a failure. Besides, more than a quarter of IMF members have had an IMF programme 50% or more of the time since they became an IMF member.

Moreover, in case of programme failures, or repeated programme engagements (which have increased over time), the IMF puts most of the blame on errors in implementation and surveillance gaps rather than the programmes themselves. Or even when the IMF's own research shows that programmes failed or programme objectives remained "often ambiguous", it calls for more "reforms" and tighter surveillance. In the few cases when the IMF admits that the impact of its adjustment programmes "was less growth-friendly than anticipated" and that "the assumed payoffs from structural reforms (for productivity and growth) were overly optimistic" and in fact "some reforms weigh on growth in the short run", it insists that they will be "paying off" later.

Several studies have tried to address this deficit in evaluating IMF programme effectiveness, though focusing on programme participation rather than programme conditions. These studies fail to find any effect of IMF conditionality on monetary growth, budget deficit, current account balance, international reserves and, most importantly, government spending.

Furthermore, evidence has shown a negative relationship between IMF programme participation and economic growth (Pakistan being the perfect example). Moreover, IMF programmes show no increase in investment, exports and employment, and an increase in the likelihood of a currency crisis. IMF programmes have also shown to increase within-country inequality and overall poverty.

The IMF programme today is designed primarily on meeting a set of benchmarks: debt sustainability, foreign exchange reserves, primary budget surplus and tax revenue targets for macroeconomic stabilisation at the expense of high economic growth. The fund was not designed at its inception to micromanage economies, nor was it designed for conditionality. Its doctrine was strictly limited to a country's balance-of-payments needs, strictly limited to what is necessary to restore macroeconomic stability as a lender of last resort.

IMF measurable benchmarks and conditionality are not economic policies but rather a financial accounting exercise and an encroachment on a country's sovereignty. Good economic policy is not about "bean counting" and what you can do and not do, but about incentives. And incentives matter. Benchmark targets and conditionality miss the whole idea of what economics is all about: human behaviour. We humans react to positive and negative incentives.

Today, virtually all the countries in the Global South that are currently on the IMF Extended Fund Facility (EFF) are underperforming and struggling to overcome the twin inter-related malaise of fiscal deficit and debt burden. Stabilisation at the expense of high growth has shown a standard of living in decline, whereas high GDP growth has shown to be powerful in improving the lives of all classes of citizens.

The only answer for a growth solution is a simple, straightforward set of supply-side economics: rationalisation of the tax system, government spending restraint, free trade, sound money, deregulation and privatisation. The wrongheaded policies delivered with brutal diktats by the IMF are anti-growth. Supply-side economics is anathema to the fund. Today the Global South remains in the middle of a political and economic crisis, and to attain prosperity it needs to retake its sovereignty and dignity by not being dependent on loan programmes and focusing on supply-side economic reforms and economic growth for long-term prosperity.

Client states of the IMF should keep reminding themselves of Professor Robert J. Barro at Harvard University, who very aptly put it in Economic Viewpoint on December 7, 1998: "The IMF doesn't put out fires, it starts them!"

THE WRITER IS A PHILANTHROPIST AND AN ECONOMIST BASED IN BELGIUM